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On the Origin of Shared Beliefs (and Corporate Culture)

Eric Jan Van den Steen

Working papers from Massachusetts Institute of Technology (MIT), Sloan School of Management

Abstract: This paper shows why members of an organization often share similar beliefs. I argue that there are two mechanisms. First, when performance depends on making correct decisions, people prefer to work with others who share their beliefs and assumptions, since such others 'will do the right thing'. Second, beliefs will converge over time through shared learning. While such homogeneity reduces agency problems, it does so at a cost. I show that, from an outsider's perspective, firms invest on average too much in homogeneity. The theory further predicts that homogeneity will be strongest in successful and older firms where employees make important decisions. Within a firm, homogeneity will be stronger among more important employees. Homogeneity will also be path-dependent, making managers more selective on early hires. Since shared beliefs are an important aspect of corporate culture (Schein 1985, Kotter and Heskett 1992), I finally show that the model matches some observations on corporate culture, such as the influence of a manager on her firm's culture and the persistence of culture in the face of turnover. A fundamental difference from earlier economic theories of corporate culture is that I show that culture, instead of being created for its own good, can be a side-effect of other purposeful actions. As a consequence, there can be too much culture in firms.

Keywords: homogeneity; shared beliefs; differing priors; corporate culture (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cbe and nep-soc
Date: 2005-09-23
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http://hdl.handle.net/1721.1/27855 (application/pdf)

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Journal Article: On the origin of shared beliefs (and corporate culture) (2010) Downloads
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